It Is Time for Some Clarity on Trade Talks

The statements out of the U.S. and China on this week's talks provide no detail whatsoever.

After the infamous U.S./China trade talks that took place over the last two days extended to a third day, the market keenly waited to hear the details of some form of an agreement. With Trump simply stating "talks are going very very well" (agreed one should be immune to his infantile one liners by now) and the Chinese waiting for the U.S. delegation to return to Washington before putting out a joint statement, it did create an expectation for a rather positive conclusion of some sort. The suspense alone drove the markets 7% higher in a matter of four days.

Some stocks rose 10%-15% higher (Amazon (AMZN) ), and some as much as 40% (Netflix (NFLX) ). Granted, most of these stocks have only managed to come back to the level they were at in the middle of December -- before the Fed FOMC meeting and the horrendous redemption-based selling that crashed stocks on Christmas Eve. It is as though the last two weeks never happened. So much for risk management.

The U.S. statement (200 words) released yesterday says that U.S. and China negotiators discussed ways to achieve "fairness, reciprocity and balance in trade relations." Additionally, the talks also "focused on China's pledge to purchase a substantial amount of agricultural, energy, manufactured goods and other products and services from the United States." Taking out the diplomatic and fancy jargon, basically in lay man's terms, this is nothing new whatsoever. According to officials close to the matter, both parties still have not agreed on some of the deeper matters (aka intellectual property theft, foreign companies rights etc.) -- the more "contentious" issues that Trump is trying to coerce China into accepting, which they have said they will respect Chinese interests.

The statement released by China this morning was even more amusing. China described U.S. trade talks as "broad, deep, detailed." Wow! All that for a 7% rally in markets. One can only imagine what a full paragraph of an agreement would have done to asset classes? If so, dare I say it, the Fed would have had to tweak its rate rises to double digits in 2019 alone if an actual agreement was reached.

For investors, it is back to the drawing board, yet again. Despite the gold fish memory most market participants tend to have, the underlying issues facing the economy and markets have not really changed since December. The data being released across the board is no doubt weak everywhere. Global PMIs are falling. Thursday morning, we saw that China's factory inflation data had slowed sharply in December, the slowdown continuing for a sixth straight month to the weakest level since 2016. China producer prices rose just 0.9% year over year (down from 2.7% in November). Deflationary pressures are on the rise in China.

All asset classes are stuck one behind the other with the handbrake pulled up; it all depends on how stubborn or willing U.S. and China are going to be to resolve this before March 1. President Trump has said if no agreement is reached by then, he would be willing to raise sanctions to 25% on $200 billion worth of goods. On top of that, he is trying to pass a bill in the house that will give him even more powers to raise tariffs whenever he so wishes on countries. Oh Lord, let's hope the Democrats in majority can stall this absurdity, otherwise countries in remote parts of the map will have to succumb to Trump just to "Make America Great Again."

Going back to the Fed. The Fed communique over the past few weeks and from December's FOMC meeting minutes, released yesterday, are as clear and supportive as they can be. To put it simply, they are mindful of the need to remove the excess money in the system as the economy is robust, but also be mindful of not going too far as markets collapse. They are leaving themselves open, as if the Trade War passes, then asset prices will be back on an upward path -- giving the Fed room to reduce their balance sheet and/or raise interest rates to "normalize" the economy.

If the Trade War drags on, there is no doubt going to be a recession, they can then step in and hold off on rate hikes if needed. Right now, they just don't know. In a matter of weeks, equities collapsed 10% and rallied 15%, so all they can do is wait and see what happens after March 1. Smart move.

If one were to look back in December, equity is the only asset class that has been temperamental. Oil, dollar and FX have held in at pretty stable levels over last few weeks. And as equities have yoyo'd, the markets expectations of Fed Funds futures have moved up and down aggressively as well. The Fed has said two rate hikes for 2019 and one for 2020. The market has moved the 2019 number from 2 to 0 to negative, now back to flat! Keeping this in mind, Powell's communique couldn't have been any better or clearer.

Markets are back to the top end of their trading ranges. To break higher from here, it will need some substantially positive news. Fourth-quarter 2018 earnings start in earnest next week. It is back to fundamentals, as investors will wait to hear how companies and earnings are actually doing, listening to their outlook to see if shares prices deserve to be higher or lower.

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